Saturday, 3 November 2012

The politics of income distribution

Countries make a choice about how national income is shared between
different groups and the next election will be about which party offers the ‘squeezed
middle’ and bottom 50% most hope that their living standards can improve.

These are the central messages I got from launch of the ResolutionFoundation’s Commission on Living Standards
final report of the launched in Whitehall on 31 October. The Commission included
top people from business, finance, unions, public services and academia, as
well as the founder of netmums, to look at the evidence and find a consensus that
could get support across the political spectrum.

The report, Gaining From Growth,shows how earnings of the bottom fifty
percent hardly rose since 2003, despite a steady rise in national income and labour
productivity. Half the population now get just 12 pence of every £1 earned in
Britain (GDP), and by 2020 their incomes will fall by 15% from the 2008 level,
down to the level in 1993.

Meanwhile people at the very top took an ever increasing
share: incomes of the top 0.1% rose 65% from 2003 to 2007 (p38 fig 2.9), a rate
of 13.4% a year compared with a rise of 1.6% a year for 90% of the population.
At its peak the top 0.1% took 6p of every pound, while the bottom half shared
just 12p.
Low paid workers did not share in the benefits of
increased productivity, as in the US since the mid-1970s, and this
was a direct result of political decisions by successive governments. The impact
on households was reduced by more women going out to work as well as tax credits
and other benefits (Chapter 6), but this also has a cost. Tax
payers now spend £4bn a year on low pay.
The Commission presents a range of recommendations* which,
it argues, would enable low to middle incomes to rise by 7% by 2020, instead of
falling 15%. If it is right, and the recommendations are implemented, it could
make a dramatic difference to people’s lives and British society.
The report is a dense document with detailed arguments and
graphs. Experts will argue about the details and consequences of different measures.
Political activists will argue that the measures
lack ambition or interfere in market forces, depending on their ideology. But most
people will not even know about the report or the debate about the politics of income
distribution. What many people experience is increasing insecurity at work, the
squeeze on incomes and rising prices.

The practical political questions are

What is the big picture story about productivity, incomes, taxes and benefits over the past 30 years?

What is the most credible story about how to improve living standards over the next five to ten years?

And what specific measures will actually bring about improvements?

This report provides evidence, arguments and recommendations, but does not tell the kind of story needed for everyday politics (and to be fair, that is not what it set out to do).Living standards will be a critical issue at the next
election. How commentators and politicians tell the story and interpret what is
happening will influence how people vote more the technical details,
but it matters a lot what the measures are and whether they can deliver. This
is where we need the intense, detailed scrutiny of what is proposed, but our
political system does not have the forums for this kind of detailed discussion
of policy.
But arguments about income inequality are not just technical
questions about how society shares the fruits of rising productivity, but what
kind of society and economy we want to live in.
Two years ago the IMF published a remarkable paper on Inequality, Leverage and Crises. This looks at how financial crises can arise as a result of
changes in the income distribution. The periods 1920-1929 and 1983-2008 both showed
large increases in the income share of the rich and a large rise in debt for the
rest, which eventually led to serious financial crises which shrunk the real economy
and impoverished many. The paper shows that this was a result of a shift in
bargaining powers over incomes, from which the low paid loose out. It argues
that increasing bargaining power of the lower income group is a more effective
way of preventing financial crisis in future.

From a practical political perspective, this
means making the case for increasing the bargaining power of the poorest in society
as a means of creating economic stability for everyone.

It was encouraging, therefore, to hear Phil
Bentley, Managing Director of British Gas, say that it was a great idea to make
firms publish data on low pay “because we need more upward pressure on pay.” Firms should also say what they are investing
in apprenticeships. “The Government, unions and employers need to be better
coordinated” to improve skills and raise wage levels at the bottom. “Sectors
like retail can pay more, because the jobs can’t be exported.” He also said the
EU Agency Workers Directive was a useful tool to stop the downward pressure on
pay.

*The recommendations are to

improve intermediate skills, particularly among the young, and define outcomes for education at 18

make the Low Pay Commission responsible for recommending an “affordable wage” for different sectors,

foster innovation in local areas to reduce reliance on low pay

require companies to report the proportion of their workforce below the Living Wage to encourage bottom-up pressure